Bloomberg News

Prudential Takes On Aflac in Benefits After Obama’s Law (1)

By Zachary Tracer and Alex Nussbaum
May 31, 2013

Prudential Financial Inc. (PRU:US) and MetLife
Inc. (MET:US) are moving onto Aflac Inc.’s turf selling protection
against diseases and accidents as the largest insurers seek to
add business tied to President Barack Obama’s health overhaul
and win valuations (AFL:US) like their smaller rival.

MetLife, Prudential and American International Group Inc.
are among life insurers that have introduced supplemental health
policies. Health insurers including Cigna Corp. (CI:US) are also adding
the coverage as the new law limits profits from traditional
medical insurance.

Workers may be encouraged to buy policies with payments
from employers who are seeking ways to cushion rising costs and
the health law’s expanded-coverage requirement. That could push
customers into the market led by Aflac, said John Swanick, U.S.
insurance advisory practice leader at Grant Thornton LLP. Aflac (AFL:US)
trades for about 1.7 times book value, while AIG, MetLife and
Prudential all sell for less than their measure of assets minus
liabilities.

There are “vast opportunities heading our way,” Aflac
Chief Executive Officer Dan Amos said on May 22. “At the same
time, success does breed competition.”

Obama’s Affordable Care Act, passed in 2010, may extend
protection to about 25 million uninsured Americans, according to
congressional estimates. It requires more employer-provided
coverage, with policies that pay for everything from routine
checkups to childbirth. Supplemental insurance, which typically
provides cash directly to policyholders if they suffer an
accident or illness, is usually bought by employees to help pay
expenses not covered by their work plans.

Limiting Risk

MetLife, the largest U.S. life insurer, is adding products
as Chief Executive Officer Steven Kandarian seeks business with
less risk tied to fluctuations in interest rates and stocks.
AIG, led by CEO Robert Benmosche, is pushing to sell more
coverage to consumers. Both companies introduced voluntary
health policies this year.

Prudential, the No. 2 U.S. life insurer, added a critical-illness policy last year and has ramped up sales efforts, Bob
Patience, vice president for voluntary benefits at the group-coverage unit, said by phone. The Newark, New Jersey-based
insurer is considering offering accident coverage, he said.

“Employers continue to expect shifting further costs to
employees,” Vishal Jain, vice president for strategy and
planning at Prudential’s group-insurance business, said in an
April 19 interview. “They’re not expecting health-care reform
to reduce their health-care cost trend.”

Prudential slipped 0.3 percent to $69.82 at 10:05 a.m. in
New York. MetLife advanced 0.2 percent, and Columbus, Georgia-based Aflac declined 0.3 percent. AIG (AIG:US) fell 1.4 percent after
saying today it didn’t receive a deposit as part of a deal to
sell a plane-leasing unit.

U.S. health-care spending is projected to be 19.2 percent
of gross domestic product by 2020, up from an estimated 17.8
percent this year, according to a report from the U.S. Centers
for Medicare & Medicaid Services.

Rapid Rise

“The cost of major medical continues to go up at such a
rapid rate,” Aflac President Paul Amos II said in an interview.
“Employers are eventually going to say, ‘Enough is enough.’”

Paul Amos said employers have options. In a move similar to
shifting to retirement accounts from pensions, employers may
give workers a set amount of cash to pay for coverage they
choose. As premiums rise, the workers’ contribution could
increase faster than the company’s payout, he said.

Or employers may cut back the scope of coverage they offer
and increase deductibles and copays. The Aflac plans help cover
gaps in less-costly plans or as deductibles and copays rise,
Paul Amos said.

Market Leaders

Aflac was the top seller last year of voluntary coverage, a
category that includes disability plans and life insurance,
according to Eastbridge Consulting Group Inc., which studies
workplace benefits. Unum Group (UNM:US) and Allstate Corp. (ALL:US) were also
among the top providers. Sales of accident policies jumped 12
percent and critical illness increased 17 percent.

Prudential estimates that 20 percent to 30 percent of
employers offer accident or critical-illness coverage. That
leaves room in the market for many carriers, Patience said.
Fewer than 10 percent of Americans purchase a critical-illness
policy, according to industry group Limra.

Sun Life Financial Inc. (SLF) and ING U.S. Inc. also introduced
voluntary health policies last year.

Sun Life, based in Toronto, is working to become a top-five
seller of group voluntary coverage in the U.S. by 2016, Wes Thompson, Sun Life’s U.S. president, said in a March 2012
presentation. That’s part of a strategy to reduce earnings
volatility.

The voluntary coverage may be more profitable than standard
medical policies under the new law. Aflac’s U.S. pretax profit
margin was 17.7 percent last year. The health law requires
companies to spend 85 percent of what they take in from large
employers on medical costs. For individual and small-business
plans, the figure is 80 percent.

Profitable Products

“Supplemental insurance can be quite profitable,” said
Les Funtleyder, health-care strategist at New York-based
investment firm Poliwogg LLC. Large medical carriers have “a
very good chance to make these into profitable products.”

Cigna, the third-largest health insurer by market value,
introduced a critical-care plan and an accident policy last
year, said Mike Witwer, vice president for voluntary business at
the Bloomfield, Connecticut-based company. UnitedHealth Group
Inc. (UNH:US), the biggest health insurer, started a plan in 2011.

“There are more new entrants to this business now than
there have been in years,” Witwer said. “Health-care costs are
going to continue to rise and that particular trend is what has
driven voluntary.”

To contact the reporters on this story:
Zachary Tracer in New York at
ztracer1@bloomberg.net;
Alex Nussbaum in New York at
anussbaum1@bloomberg.net

To contact the editor responsible for this story:
Dan Kraut at
dkraut2@bloomberg.net